SanDisk 2004 Annual Report Download - page 25

Table of Contents
method of accounting. With respect to all equity investments, we review the degree of control that our investment and other
arrangements give us over the entity we have invested in and our business to confirm that these conclusions are correct.
Additionally, we evaluate whether entities that we have invested in are variable interest entities within the meaning of the
Financial Accounting Standards Board Interpretation No. 46, Accounting for Variable Interest Entities. If those entities are variable
interest entities, then we determine whether we are the primary beneficiary of that entity by reference to our contractual and business
arrangements with respect to residual gains and residual losses on liquidation of that entity.
Share Based Compensation. As discussed below, we historically accounted for employee stock based compensation using the
intrinsic value method, and accordingly no expense has been recognized in our consolidated income statements for options granted to
employees or directors under our stock option plans. We have also accounted for our employee purchase plan using the intrinsic value
method and accordingly, we have not recognized any expense for the discount provided on the fair market value of the stock sold
under our employee stock purchase plan.
Valuation of Financial Instruments. Our short−term investments include investments in marketable equity and debt securities. Our
investments in these securities are carried at market value, with any increases or decreases above cost, or amortized cost in the case of
debt securities, being recorded as a component of other comprehensive income. We evaluate market conditions, offering prices, trends
of earnings, price multiples and other key measures to determine whether declines in market value below cost, or amortized cost in the
case of debt securities, is other−than−temporary. When such a decline in value is deemed to be other−than−temporary, we recognize
an impairment loss in the current period operating results to the extent of the decline.
We have the financial capability and the intent to hold our loans to the ventures with Toshiba until maturity and accordingly those
loans are carried at cost and their value in our financial statements is not adjusted to market value.
Deferred Tax Assets. We provide a valuation allowance against deferred tax assets if it is more likely than not that such an amount
will not be realized. At January 2, 2005, we carried a valuation allowance on our deferred tax assets of approximately $12.3 million
based primarily on our more likely than not basis, the inability to take tax benefit for unrealized capital losses on our investments in
foundries. At December 28, 2003, based on the weight of all available evidence, we carried no valuation allowance on our net deferred
tax assets. At January 2, 2005, our valuation allowance associated with unrealized losses on our Tower investment was reflected in
accumulated other comprehensive income.
Foreign Currency. We determine the functional currency for our parent company and each of our subsidiaries by reviewing the
currencies in which their respective operating activities occur. Transaction gains and losses arising from selling products and other
activities other than the applicable functional currency are calculated using average exchange rates for the applicable period and
reported as a non−operating item in each period. Balance sheet items denominated in a currency other than the applicable functional
currency are translated using the exchange rate in effect on the balance sheet date and are included as a separate component of other
comprehensive income. As permitted under Statement of Financial Accounting Standards No. 52, Foreign Currency Translation, we
do not mark to market our contingent foreign currency exposure on our take−or−pay and lease guarantee obligations related to the
ventures with Toshiba. Although we do not currently hedge our foreign currency exposure, we evaluate our foreign currency
exposures and may enter into hedges or other risk mitigating arrangements in the future.
Results of Operations
Comparison of 2004 and 2003
Product Revenues. Our 2004 product revenues were $1.6 billion, an increase of 63% over $982.3 million in 2003. The increase in
our product revenues was comprised of a 167% increase in the number of megabytes sold and a 38% reduction in our average selling
price per megabyte. The markets 20